Andy Xie is predicting that the Chinese property bubble is set to burst.
As bank lending slows, “it’s very difficult to see this demand continuing,” Xie, formerly Morgan Stanley’s chief Asian economist, told Bloomberg Television in Hong Kong today.
The Chinese economy has done relatively well during the financial crisis, in part due to an aggressive stimulus program. However, this has led to an explosion of credit, which has spawned another property bubble in China. Credit and property bubbles rarely end well.
Growth in China has buoyed commodity markets. Canada is a large exporter of commodities. Canada has done relatively well compared to the US economy and the rest of the world, partly because Canada has been good but also partly because Canada has been lucky. If the Chinese economy stalls because of a collapse in property prices, commodity prices will fall hard as China has been the global marginal buyer of all things coming out of the ground.
Of course, Chinese demand for commodities is not the only driver of Canadian exports. More than a third of all products and services made in Canada are exported to the United States. However, it is my opinion that the recovery in the US will be anemic, and American stock markets may now be in the process of topping.
(The thesis from which I am currently working is that after a large bounce, the stock market moves sideways for some time, perhaps two to five years.)
If this is the case, demand from the US will not be strong enough to offset the fall in demand for commodities from China. Roughly half the Canadian stock market is comprised of energy and materials companies. Canada will underperform in this scenario.
I am short Canada, and am short risk assets in general. I believe that rallies are now to be sold rather than dips to be bought, and I plan on getting more aggressive on the short side into this rally. I may be dead wrong, and if I am, I will quickly turn around my portfolio, and I likely won't tell you about it, or at least not in real time.
However, stocks are not cheap, the economy is weak, liquidity at best is capped and may soon be tightening, sovereign risk is rising, and the market may be tracing out the top of a range it may trade within over the next several years.